Traders brace for full-blown currency war as China’s yuan sinks

Traders in Asia are bracing for a full-fledged currency war, after a slide in China’s yuan past the 7 per dollar mark raised the prospect of policy makers allowing their exchange rates to weaken to remain competitive.

Currencies slumped across the region Monday, with South Korea’s won tumbling to the weakest in three years after the offshore yuan plunged almost 2% to an all-time low of 7.11. The yen and Treasuries rallied amid a flight to safety.

“Without a doubt the global currency war is here, and it’s a natural extension of the trade war that’s just taken a turn for the worse,” said George Boubouras, director at Salter Brothers Asset Management Pty in Melbourne. “We’re likely to continue seeing the effects reverberate through markets — I expect to see the yen, dollar and Treasuries continue to strengthen as things heat up.”

Traders are interpreting the yuan’s drop past the 7 mark as a signal that Beijing is prepared to wield its currency as a tool amid a widening rift with Washington. The People’s Bank of China pledged to keep the yuan stable after it dropped beyond 7 and said the decline was fuelled by expectations of further tariffs on Chinese goods.

The yen strengthened against all its major peers and touched 105.80 to the dollar, the strongest since the so-called flash crash in January. The yield on Treasuries due in a decade slid eight basis points to 1.76%, the lowest in almost three years.

Japan’s currency may strengthen to 105 in the short term as investors scramble for safety, according to Terence Wu, a strategist at Oversea-Chinese Banking Corporation in Singapore.

The yen has climbed more than 3% against the greenback this year, the top performer among G-10 currencies, as the US-China trade rift widened.

Still, not everyone is sure the moves herald the start of a global currency war.

“I don’t think China is trying to devalue the yuan,” said Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui DS Asset Management in Tokyo. “We need to see whether the central bank will continue to set the yuan lower at its fixings in coming days.”

In the mean time, risk-sensitive emerging Asian currencies could be headed for further losses, according to Scotiabank.

“I see further downside potential for regional currencies at the moment,” said Qi Gao, a currency strategist at Scotiabank in Singapore. “When market sentiment stabilises, we could see high-yielding currencies such as the Indian rupee and Indonesian rupiah outperform the won, Taiwan dollar and offshore yuan.”

© 2019 Bloomberg L.P.